Defense, energy and pharma top lists

Commentary: Five stocks favored by big money managers

By

MauriceBarnfather

BEVERLY HILLS, Calif. (BigMoneyWatch) -- What's on the minds of smart money managers in the aftermath of President Bush's re-election?

Of course, opinions on the stock market are a dime a dozen and any one of us could produce a room full of bulls and a room full of bears -- but one pays careful attention when the leading money managers make pronouncements.

Big Money Watch uses 13-F filings, exclusive interviews and investigative journalism to uncover the real trading activities of some of the world's top fund managers.

Legg Mason Value Trust's Bill Miller, not known for his brevity, speaks for all when he says: "I still think things look fine: profits are growing, inflation is tame, productivity growth is high, cash flow and free cash flow are at record levels, corporate balance sheets are in great shape, and valuation is not demanding."

Not even our record deficit that has sent the dollar into free-fall against the world's major currencies is causing the big money men to lose sleep. Overseas money will continue to flow into the U.S. because, as Scott Black of Boston-based Delphi Management puts it, "What choice do they have?"

This might explain why Bridgeway Capital's John Montgomery, for instance, is "fully invested."

Defense and pharmaceuticals

Noting the tsunami size wave of money flowing into defense behemoths like General Dynamics and Raytheon, and the smaller Ceradyne and DHB Industries, Montgomery quietly raised his stake in Armor Holdings
AH, +1.52%
now representing 1.25 percent of his portfolio.

This Jacksonville, Florida, maker of flak jackets, helmets and shields, is the Pentagon's supplier-of-choice for Humvee protective armor, a priority in Iraq.

Like defense stocks, the drug industry breathed a collective sigh of relief at Mr. Bush's re-election. But Montgomery bought into a company with a twist. First Horizon Pharmaceutical
FHRX
is a drug company doing no basic research that lives very nicely, thank you, on the fruits of the billions invested by the world's big pharmaceutical companies.

FHRX spends money all right, but not to build new lines of drugs. It acquires and licenses off-patent and other drugs from the likes of Pfizer, Bayer, Johnson & Johnson, Novartis and Merck. And it's smart enough to focus on the two highest-margin, fastest growing, areas: cardiology, and women and children's health.

Energy

With the President set to loosen the ties-that-bind domestic oil and gas exploration, Montgomery ran his slide rule over Mission Resources
MSSN
Like Franklin Templeton, Vanguard and Barclays Bank, he bought the stock, recently a shade over $6, with a view to doubling his money in a year.

MSSN uses advanced 3-D seismic and computer-aided technology to look for oil and gas along the Texas and Louisiana Gulf Coast, West Texas's Permian Basin and southeastern New Mexico -- all places where restrictions on exploration will likely be relaxed.

Warren Buffett rarely invests in foreign stocks, let alone state-controlled ones. True, he has large stakes in huge overseas earners like American Express, Gillette and Coca Cola. Now, however, with China-friendly policies set to continue, Berkshire Hathaway has put $31 million into PetroChina
PTR, +1.73%

With China consuming ever more oil to fuel its rapid industrialization, it risks developing an ever-greater dependency on foreign suppliers. That's anathema to the security-obsessed Chinese. The answer? Build your own international oil company to rival the likes of Exxon-Mobil, Shell and British Petroleum. As they do, "The Sage" will reap his due rewards.

If oil exploration will get a fillip from Mr. Bush's re-election, so, too, will coal mining. The Clear Skies Act, with its lower pollution standards, now has a chance of passing, which will prompt power generators to build more coal-fired plants.

To the rest of us, Florida-based WLT may look like a rag-bag of businesses in homebuilding, financing, industrial products and natural resources. But Tepper, who built up a 15 percent stake in a matter of days, noticed that 60 percent of WLT's third-quarter operating income was generated by coal.

Rid itself of the excess baggage and concentrate on the black stuff, and WLT will be worth a heck of a lot more than the $16.15 to $17 a share that Tepper paid for his stake.

There is no such thing as a guaranteed prediction -- only informed guesses and reasoned probabilities. But the advice from the big money managers we talked with was unequivocal: Buy stocks.

Maurice Barnfather is editor in chief of the Big Money Watch newsletter. He's a former senior editor of Forbes and an investigative journalist for the Economist magazine. Barnfather has no positions in any securities mentioned in this report. (bigmoneywatch.com)

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